Credit Spread

Credit spread is the yield premium that a corporate or non-government bond offers over a comparable-maturity government bond (typically a Treasury), compensating investors for taking on credit risk — the possibility that the issuer may default or experience a credit downgrade. Credit spreads vary by rating: AAA-rated bonds might trade 30-50 basis points over Treasuries, while BB-rated high-yield bonds might trade 300-500+ basis points over Treasuries. Spreads are dynamic, widening during economic uncertainty and tightening during confidence. In the 2008 financial crisis, investment-grade spreads widened to over 600 bps, while in strong markets they can compress below 100 bps. Credit spreads serve as a real-time barometer of market risk appetite — widening spreads signal fear and tightening spreads signal confidence. The "credit spread curve" showing spreads across different ratings provides insights into how the market prices incremental credit risk at each level.